flatbread factor emerging markets 2007
TRANSCRIPT
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The Flatbread Factorby Alonso Martinez and Ronald Haddock
from strategy+business issue 46, Spring 2007 reprint number 07106
2007 Booz Allen Hamilton Inc. All rights reserved.
strategy+business
Reprint
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Gruma SA, a company headquartered near
Monterrey, Mexico, is the sort of enterprise that you
might expect to operate solely within its countrys
borders. Its main line of business in Mexico is the pro-
duction of corn flour and related products, highly
sought-after commodities in a land where corn is plen-tiful and tortillas are a staple. But Gruma is also a
US$2.5 billion international powerhouse with manufac-
turing plants in the United States, Venezuela, Costa
Rica, the United Kingdom, and China.
Grumas Shanghai facility is enormous. At the time
of its opening in October 2006, it employed 180
people; represented a $100 million investment; and
could annually produce 15,000 tons of wheat tortillas,
7,000 tons of corn tortillas, and 6,000 tons of snacks. It
found ready customers among Asian distributors in
Japan, Korea, Singapore, Hong Kong, Thailand, the
Philippines, and Taiwan. And Gruma immediately
began sizing up new markets just over the horizon. In
the first stage, we will supply the continental China
market, gradually increasing our range to the European
and Asian borders of the Middle East. To us, this is along-term investment that will lead to strategic new
business opportunities, says Roberto Gonzalez Barrera,
chairman of Gruma.
Why is a Mexican company with a niche food prod-
uct like corn flour doing so well in Asia, with plans to
expand into the Middle East? The answer lies in a sim-
ple yet powerful insight: Markets in emerging countries
tend to follow the same path of development. These
emerging markets exhibit a natural life cycle a pre-
dictable pattern of consumer demand that is evident in
To understand the life cycle ofan emerging market, learn to
decode its consumer products.
by Alonso Martinez and Ronald Haddock
THE
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FlatbreadTHFactor
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IllustrationbyMichealKlein
IllustrationsbyMichaelKlein
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steel, wheat, consumer products, and every other major
economic sector. Business leaders who understand this
pattern can leverage the similarities from market to mar-ket and grow a company accordingly.
By observing the life cycle of emerging markets
around the world and recognizing the true advantages of
its business model on the global stage, Gruma expertly
timed its entry into many countries. Ultimately, its most
versatile and marketable product has proven to be not a
food, but a process more specifically, the ability to
roll any kind of flour, from corn to wheat to rice, into
salable flatbread. Most people from India do not eat
corn tortillas, but they do eat a flatbread called naan,
made from wheat, which Gruma sells in the United
Kingdom and plans to sell in India. The Chinese dont
have much taste for corn tortillas either, but they buy
wraps made by Gruma for Peking duck.
Dj Vu in Global Markets
The companies that use their awareness of the emerging
markets life cycle to succeed can be categorized into two
types. The first is a growing number of multinational
corporations from industrialized nations. They have
been spotting opportunities around the globe and plan-ning tactical and strategic decisions accordingly. The
second type is like Gruma: formerly local companies
from emerging countries with a primarily local or
regional market base. These companies are becoming
global players in their own right. They accomplish this
ascent by applying their instinctive knowledge of
emerging markets to extend their reach into other devel-
oping countries.
In one week in 2006 in Shanghai, the authors of
this article crossed paths with several executives from
multinational corporations, each of whom had a
Brazilian connection. Some were long-standing multi-
national executives; their careers at General Electric andUnilever had brought them first to Brazil and now to
China. Others were from Bunge and Gerdau, compa-
nies with long histories in Brazil that have become
multinational enterprises. (Gerdau, for example, is the
majority shareholder in the Florida-based company
Gerdau Ameristeel, and Bunge is a leading agribusiness
and food conglomerate serving worldwide markets.)
Although these executives came from different indus-
tries, they all saw China the same way. It was producing
the same kind of growth they had seen in Brazil after the
so-called Brazilian miracle, but at a bigger scale and
higher speed. They (and their companies) recognized
that the products, business models, and management
experience they had developed in Brazil could be valu-
able in China, too.
Indeed, people involved in global enterprise have a
growing feeling of dj vu: a sense that no matter
whether theyre in China, Eastern Europe, or Brazil,
they have seen similar market dynamics before. And
they have; the life cycle of emerging markets is no
figment of the imagination. As global communicationand transportation bind the world ever more tightly,
global corporations are discovering how relevant their
experience can be as long as they are willing to
recognize the current stage of market development
in each country they enter, and then adjust their strate-
gies accordingly.
As a country evolves from developing nation to
industrialized nation, the populations basic needs pass
through four distinct stages. In developing countries,
most of the population is preoccupied with basic
Alonso Martinez
([email protected]), asenior vice president withBooz Allen Hamilton based inNew York, works with globalmultinationals and leadingLatin American companies,particularly in the consumerproducts industry. He advisescompanies on transformationand growth strategies.
Ronald Haddock
([email protected]) isa vice president and director ofBooz Allen Hamilton inGreater China. He works withconsumer goods and industri-al companies from around theworld on strategies for growthand operational effectivenessin the Asia Pacific markets.
Also contributing to this articlewere Booz Allen HamiltonSenior Associate AndrewSambrook and Michael Sisk.
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survival obtaining adequate food, shelter, and cloth-
ing. (Much of sub-Saharan Africa is in this stage right
now.) As a middle class emerges, people seek greaterqualityin their food, housing, and clothing. (This is cur-
rently happening, for example, in much of China and
India.) Once a transitioning markets population can
afford relatively high quality, they begin to seekconven-
ience; they buy time-saving appliances and processed
foods, and they may move closer to work. (This stage is
emerging today in Eastern Europe and Latin America.)
Finally, as the market graduates into the realm of devel-oped nations, the population wants customization; with
needs for survival, quality, and convenience now met,
people will spend a premium (as many do in North
America, Japan, and western Europe) to satisfy individ-
ual tastes and desires.
Urbanization explains why Grumasstrategy is so powerful. Flatbread is a popular
premade food for new city dwellers.
40%
20%
0
20%
40%
60%
Brazil
China
Hungary
India
Poland
Turkey
Normalized GDP per capita
Cumulative change in total wheat consumption per capita,19802003
Exhibit 1: The Wheat Wave: Common Patterns of ConsumptionConsumers tastes change as an economy matures, and the consumption of staples like wheat reveals how. First, wheat consumption rises (trackedhere with the data for China and India), then it falls (China, Turkey, Brazil), and finally levels off (Poland, Hungary). The overall pattern (shown in theshaded gray line) can be tracked for many of the basic food commodities in most countries.
$0 $5,000 $10,000 $15,000
Source: Food and Agriculture Organization of the United Nations FAOSTAT, online database (19612003); International Monetary Fund, World Economic Outlook Database,
April 2006
Survival Convenience Customization
Quality
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Bulk Grain and Melting Chocolate
The maturation of the food value chain provides a clear
example. At the survival stage, when people live pri-marily in rural villages, they grow their own food; they
also buy basic carbohydrates such as flour and corn in
bulk. Then, as they become slightly more affluent in the
quality stage, they shift to basic packaged goods, includ-
ing some branded staples, and a higher variety of pro-
teins, fruits, and vegetables. At the convenience stage,
often after moving to a city and taking jobs there, con-
sumers buy branded processed foods, such as premade
tortillas. In a mature economy, customers seek niche
products, such as health foods. Every country fits some-
where (perhaps in more than one place) in this evolu-
tionary progression. (See Exhibit 1.)
Although the overall patterns are universal, the
evolution of every country is distinct, influenced by its
culture and consumer habits. For example, in the con-
fectionery markets, poorer economies tend to prefer
sugar candy, which is cheaper and easier to distribute.
When economies enter the quality stage, chocolate
tends to take over. Yet in Mexico, where chocolate orig-
inated, chocolate consumption is low. (See Exhibit 2.)
Several factors are responsible. First, Mexicans gen-erally prefer lemon and chili flavors, which go better with
sugar candy than with chocolate. Second, Mexico has a
large number of local sugar manufacturers, and the
North American Free Trade Agreement prevents high
sugar tariffs. These factors create a very competitive mar-
ket for sugar in Mexico; sugar is priced at 55 percent of
the price of chocolate (in comparable countries, the fig-
ure is 90 percent). Finally, most of the distribution chain
in Mexico lacks refrigeration, and chocolate can melt in
transit. If it survives the trip, it may melt at the point of
sale which is dominated by small, independent gro-
cers with poor facilities.
Mexico is thus idiosyncratically disposed against
chocolate. But such distinct food preferences, which
may add complexity to a companys market strategy, do
not contradict the overall pattern of development.
Better Market MeasuresHow, then, can decision makers at a multinational
corporation recognize which stage in the emerging mar-
kets life cycle a given country has reached? The main
stumbling block is misleading measurements.
Companies often rely on a countrys average gross
domestic product (GDP) as an index of the maturity of
a local market. But average GDP, because it aggregates
middle-class and poor customers, does not accurately
represent a nations patterns of development. Thus, it
can be a misleading measure for timing a companys
20%
40%
60%
80%
100%
Chocolate
Sugarconfectionery
Gum
India
Chin
a
Ukrain
e
Brazil
Russia
Pola
nd
Mexico
U.S.
Exhibit 2: Chocolate Bars: Cultural Influence
Asacountrysaveragewealth increases,people in that countrydevelopa
preferenceforchocolateoversugarcandy.But cultural tastes influence
thecommoditylifecycle: People inChinaandMexico buylesschocolate
thanaverage,whereas Eastern Europeans buymore.
Increasing Gross National Income per Capita
Confectioneryconsumption by type, 2005
Source: Euromonitor 2006
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entrance into local markets.
This point is especially critical in countries as mas-
sive as China and India. Each of those countries con-
tains distinct regions that should be treated as markets in
their own right. The Yangtze River delta, with Shanghai
at its center, has a population on par with the largest
countries in Europe. And the GDP per capita is much
higher there than it is in most other Chinese regions.Executives should focus instead on four factors in a
countrys operating environment:
Political and Legal Evolution.A countrys regula-
tory and legal environment has a huge impact on
the patterns of development of all industries within
its borders.
For instance, Indias government has long imposed
laws that protect local mom-and-pop retail stores by
barring most foreign direct investment. Large retailers
also must negotiate central, state, and local government
rules that reflect the countrys long-standing socialist
influence.
One 2003 study found that an Indian entrepreneurwould need, on average, 15 licenses from 11 govern-
ment bodies to open a new shop, and securing them
would take, on average, six months. Meanwhile, labor
laws constrain the growth of large retailers by making
it hard to lay off staff. One result: India is a land of
1 billion people and virtually no supermarkets.
Many observers believe that Indias government will
lift these regulatory constraints, which would provide
huge opportunities for food companies. Reliance
Industries, a conglomerate that is Indias largest private-
sector enterprise, is already anticipating regulatory lib-
eralization and plans to invest in more than a thousand
supermarkets. Meanwhile, Wal-Mart announced in
November 2006 a joint venture with Bharti Enterprises,
a large Indian company involved in telephony, insur-
ance, and agriculture. The goal: a new chain of
Wal-Martbranded retail stores with Indian ownership.
In China, by contrast, protections for small shop-
keepers do not exist, and workers are not allowed to
form independent trade unions (a policy set up to keep
employment fluid and wages low). Chinese supermar-kets and hypermarkets have thus evolved so quickly in
10 years that they already account for 75 percent of the
total value of retail sales in the country. From 1994 to
2002, the number of supermarkets in China grew aston-
ishingly fast, from 2,500 to 53,100, according to a
report from the Food Industry Center at the University
of Minnesota. The net effect is a more mature food and
retail market in China than in India, even though Indias
middle class emerged earlier. (See Exhibit 3.)
A clear and enforced property-rights system is
Exhibit 3: Retail Formats: Regulatory Influence
Different regulatoryregimes haveled toadifferent mix ofretailoutlets inIndia(which favorssmall, independent stores)andChina(which hasencouragedsupermarketsand hypermarkets).Asregulationsshift,globalmarketersmust adjust theirstrategies in thosecountries.
Percent ofretailspending,2005
20%
40%
60%
80%
100%
Specialty marketsBeverageand tobacco
stores, health food
stores,etc.
Independent stores
3,0009,500squarefeet;
independentlyownedstoresandchainsoffewer than10stores
Convenience stores
Less than4,300
squarefeet,oftenowned
bylargechains
Supermarkets
andhypermarkets
Over4,300squarefeet
Source:Euromonitor2006
India China
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What Would Mom and Pop Do?by Leticia Costa, Fernando Fernandes, and Guillermo DAndrea
If youre looking for innovation in the
retail sector in Latin America, dont go
into the high-end stores: Look at what
C.K. Prahalad calls the bottom of the
pyramid. Elektra is the leading elec-
tronics and appliances chain in
Mexico, with 741 stores and annual
revenues of US$1.8 billion. However,
because many low-income customers
at Elektra make purchases on credit,
defaults are a major concern. When a
payment is late, therefore, Elektra lets
the customers neighbors know. Its a
smart form of peer pressure that pays
off as the customer pays up.This is an extreme example of the
lengths to which some major compa-
nies go as they challenge the tradi-
tional dominance of small, local
stores in low-income areas. A retailer
like Elektra has essentially created
hundreds of mom-and-pop stores,
with one notable difference: They
all share the same corporate parent.
This model bears watching for com-
panies that have designs on other
emerging markets.
These retailers understand that the
best way to attract consumers in
emerging economies is not necessar-
ily with rock-bottom prices. By bal-
ancing the need for affordability with
the latent aspirations of emerging
consumers, these companies have set
the bar for other retailers in emerging
markets. The consumers they target,
who represent 50 percent or more of
the population in Latin America,
respond enthusiastically to innova-
tions like these:
Better Access to Higher-Level
Products or Services. Some success-
ful retailers make it their mission to
allow emerging consumers to pur-
chase something that has beenpreviously unaffordable to them (for
example, a television or a washing
machine). Often this involves creative
financing for consumers who have lit-
tle or no credit history. Some retailers
inspire loyalty by offering consumers a
level of sales assistance and services,
such as extended warranty and home
delivery, that they have never gotten
from large chains. Others have in-
troduced creative credit-scoring
schemes that bring some customers
access to credit for the first time.
Casas Bahia, the largest household-
goods retailer in Brazil, has had rev-
enue growth of approximately 16 per-
cent per year since 1999. It hires sales
staff from local communities and
trains them to work with customers
on buying sensibly, thus encouraging
consumers to stay within their budg-
ets which both reduces the chance
of defaults and cuts down on cus-
tomer frustration.
The company has also developed an
online central credit system that dele-
gates a significant amount of respon-
sibility to salespeople: Staff members
are authorized to give up to 600 reals
(approximately $275) in credit to cus-tomers who provide a home address
and are not blacklisted by the nation-
wide online credit protection service.
Once customers are approved, they
can make payments in as many as 18
installments, and will receive further
offers of credit after paying off their
purchase. Customers must make
their payments in person unless they
choose to pay an additional fee, which
gives Casas Bahia 18 opportunities to
strengthen the relationship before the
next big purchase.
Affordable Design and Quality.
Retailers must often battle the per-
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another critical piece of a countrys legal and regulatory
environment. In China and Mexico, persistently high
levels of intellectual property infringement have dis-
couraged Microsoft and other companies from rollingout some products. But as laws emerge that hold viola-
tors accountable, reduce the supply of low-cost fakes,
and spur demand for authentic products, the matura-
tion of Chinese and Mexican technology industries will
accelerate as well.
Infrastructure. The extent, quality, and develop-
ment of a countrys roads, bridges, ports, and telecom-
munications anything that supports physical and
informational exchange deserves close scrutiny.
Indias road system, for example, has been severely ne-
glected; traffic congestion, frequent checkpoints, and
paperwork add hours of delay. A trip across the country
by truck that would take two days on roads like those
found in developed nations instead takes a week.In China, the infrastructure challenges for large
retailers such as Wal-Mart are also enormous. China,
roughly the size of the contiguous U.S., still doesnt have
a nationwide logistics network of trucks, highways, and
warehouses that can efficiently deliver supplies from
farm to shop shelf. Refrigerated trucks are scarce, so
Wal-Mart often cant match the fresh produce and low
prices found at open-air venues where the Chinese tra-
ditionally shop. Whats more, only about one-fifth of
Chinas freight trucks are containerized, so most cargo is
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ception held by emerging consumers
that if an item is stylish and sold in a
trendy store, its not for them. Casa &
Ideas, a Chilean home decor retailer,
performs a careful balancing act
between affordable and exclusive.
Thanks to a dedicated, in-house
design staff of 35 people and a net-
work of suppliers in low-cost coun-
tries, the company can put out two
collections per year of basic items and
between two and four additional
collections of limited-edition items.
Emerging consumers, happy that a
store is specifically aiming to providethem with trendy items, have devel-
oped a strong loyalty toward Casa &
Ideas; 70 percent of its sales now
come from frequent shoppers.
Assortment and Location. Many
emerging consumers struggle with
the choice between the limited selec-
tions at conveniently located small
stores and the large selections at
chain stores that are difficult to reach
because they are only in big cities.
Magazine Luiza, a Brazilian retailer of
basic home goods, has developed an
unusual solution in 52 of its small
local virtual stores. It makes sure
customers can get as many goods as
possible not by stocking a broad
inventory, but by making its entire cat-
alog accessible at its stores via the
Internet. Customers visit the physical
storefronts to shop online. Unlike
other companies that have failed in
that endeavor by employing a self-
service model, Magazine Luiza uses
sales clerks to educate consumers on
the concept. The stores retain a
friendly, local flavor by offering an
hour of free Internet access to every
customer, with an additional hour for
those bringing in a new customer. Thecompany also partners with local
charities to provide information ses-
sions on such topics as literacy,
healthy living, and child care.
By making a broad range of prod-
ucts accessible in small towns at
the low prices usually available only at
large-scale, big-city retailers, compa-
nies like these have opened up access
to the large market segments of the
bottom of the pyramid.
Leticia Costa ([email protected])
is a vice president with Booz Allen
Hamilton and president of the firms
office in Brazil. She is an expert on the
consumer packaged goods, retail, food
and beverage, tobacco, and automotive
industries, and currently oversees work
with industrials in the Southern Cone.
Fernando Fernandes (fernandes_
[email protected]) is a principal with
Booz Allen based in Sao Paulo, where
he focuses on business development
and channel strategies for the con-
sumer goods and retail industries.
Guillermo DAndrea (gdandrea@
iae.edu.ar) is chair of the marketingdepartment at the Instituto de Altos
Estudios Empresariales, part of the
Universidad Austral in Buenos Aires,
and research director for the Coca-
Cola Retailing Research CouncilLatin
America.
Also contributing to this article were
Booz Allen Hamilton Senior Executive
Advisor Alejandro Stengel, Booz Allen
Vice President Carlos Navarro, and
Fabio Fossen.
vulnerable to damage on flatbed vehicles. The trade
group AmCham-China (the American Chamber of
Commerce in China) estimates that transportation and
distribution costs make up at least 16 percent of overallproduct costs in China, compared with less than 4 per-
cent in more developed countries.
Nevertheless, China is rapidly building an extensive
higher-quality road network. Infrastructure improve-
ments are also spurring the growth of third-party logis-
tics companies, which are still largely absent in India.
The burgeoning logistics industry has a ripple effect,
encouraging the entrance of more companies as confi-
dence grows that they can coordinate the storage and
movement of their goods around the country.
Anyone seeking to develop a strategy for the fruit
and vegetable retail industry in China or, for that
matter, the chocolate industry in Mexico needs to
track the speed at which the infrastructure is changing.Specifically, how soon might refrigerated transportation
be available? Wherever it shows up, a more mature mar-
ket will follow.
The infrastructure can also include such transac-
tional supports as financial and legal services. A strong
consumer finance industry can accelerate sales of prod-
ucts as varied as automobiles, white goods, cell phones,
and apparel. In South Korea, for example, the rapid rise
of consumer financing and information about products
and services drove a huge wave of growth. From 1999 to
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2002, LG Card, the countrys leading credit card com-
pany, boosted card issuance from some 40 million to
more than 105 million, translating into a 600 percentincrease in total consumer spending.
Urbanization.As Stewart Brand noted in his arti-
cle City Planet (s+b, Spring 2006), the proportion of
humanity living in or near cities is passing 50 percent for
the first time in history. In a country like China, where
the population of urban dwellers grew by 90 million
people between 1999 and 2003, its hard to overstate the
impact of this trend.
Urban families tend to have two incomes, with both
adults working outside the home. This gives consumers
more purchasing power, but also less time for food
preparation and other household chores. Urban dwellers
thus tend to buy more manufactured foods, particularly
staples such as bread. Food companies then sell less flour
directly to consumers and more in bulk to bakeries.
Demand also grows for such personal-care products
as shampoos, conditioners, and deodorants. Sales of
microwave ovens, refrigerators, and washing machines
rise. So do fast-food restaurant revenues, driven by
women entering the sales force. (In Shanghai, the aver-
age person eats most meals outside the home.)Urbanization explains why Grumas flatbread strat-
egy is so powerful. Flatbread provides a quick and inex-
pensive meal; thus flatbread is one of the most popular
premade food products that new city dwellers purchase.
Distribution Channels.As an economy evolves, so
too do the channels through which consumers purchase
products. By anticipating these changes, companies can
outmaneuver the competition.
Perhaps the most obvious distribution channel is
the retail format, which evolves and converges in very
similar patterns across the world. Large formats such as
hypermarkets and mass merchandisers have grown
quickly in emerging markets. Frances Carrefour SA hasbecome the largest player in both Brazil and China. A
Carrefour in Shanghai is similar to one in Sao Paulo, but
with added sections for Chinese products such as
dumplings, mushrooms, and teas.
Gasoline retailers also follow a near-universal evo-
lutionary arc. First come full-service stations that sell
only gas, then stations with convenience stores, and then
chains with self-service gas pumps and employees run-
ning a retail store.
The skill and education of the local sales force and
the customer base also affect maturation. The more
expensive or complex the product being sold, the more
sophisticated the sales force must be. Retailers such as
Home Depot and Lowes thrive in Europe and the U.S.,
where the do-it-yourself approach is prevalent. But in
China, people have little experience with home remod-
eling or repairs, which is why Home Depot entered the
market only in 2006 (when it acquired Chinas leading
home improvement retailer, The Home Way, a chain
with just 12 stores).
The Dual Platform
Many senior decision makers in multinational corpora-
tions intuitively grasp the life-cycle patterns of the mar-
kets they enter. But these insights are rarely translated
into a global business strategy.
What would such a strategy look like? That depends
on where the strategists come from. Although multina-
tional corporations from the industrialized world see the
same opportunities that the energetic new companies
from emerging markets see, their challenges are distinct.
Many corporate leaders intuitively graspthe life-cycle patterns of markets, but these insights
are rarely translated into strategy.
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Multinationals must devise a strategy for the emerg-
ing markets that allows them to prosper while keepingtheir existing customer base intact. This means creating
a dual-platform approach: Keep offering developed mar-
kets the existing portfolio of products and services, while
adding a distinct and separate set of products and ser-
vices for emerging markets.
This second platform cant simply be a
cut-rate version; it must be
designed as a whole for the
emerging market customers,
even if the two platformsare both applied within
one nation. For example,
the automobile industry
has historically offered
stripped-down versions
of its regular car models
to consumers in devel-
oping markets. In
2004, Renault turned
that strategy upside
down with its launch of the
Logan, a relatively full-fea-
tured car selling for less than
$10,000. As the Wall Street Journal
noted in October 2006, Renault sold
145,000 Logans in the models first full year, largely
in Eastern Europe and the Middle East; production rap-
idly expanded from there to Russia, Latin America, and
North Africa. In India, Tata Motors is outflanking the
Logan with its launch of a $3,000 car probably the
first of many such vehicles aimed at drivers in emergingmarkets. (See One Billion New Automobiles, by Bill
Jackson and Vikas Sehgal, s+b,Winter 2006.)
Executives at a global manufacturer of swimming
pool equipment grasped this dual-platform concept
recently while devising a strategy for the Chinese mar-
ket. At first the companys prospects in the country
seemed dim because few Chinese have swimming pools.
But backyard ponds with koi (ornamental carp) are
ubiquitous in China and potentially in need of their
own pumps, filters, and accessories. The company is
now considering a dual platform in China: a fish pond
business alongside its traditional business.Another example is Cadbury Schweppes PLC,
which is extending the successful dual platform that it
built in India into other Asian markets. Bharat Puri,
regional commercial strategy director at Cadbury, says
that the companys approach hinged on a couple of key
insights. First was unit price. It didnt
matter to consumers that buy-
ing 25 pieces of chocolate at
once was cheaper in the long
run than buying a few ata time. The average
Indian could afford to
buy only in small
quantities. After Cad-
bury began selling
a 1-rupee package
(equivalent to about
2 cents) that con-
tained four small
pieces of chocolate,
sales in India doubled in
a single year.
After the success of the
1-rupee package, Cadbury tried to
increase its gross margins to corre-
spond to its other markets; the company reduced
its package size from four chocolates to three, while
keeping the price the same. The reaction was swift
an astonishing 85 percent decrease in sales. The
lesson: Consumers at every income level recognize and
demand value. (Not surprisingly, Cadbury quicklyrestored the fourth chocolate.)
Another lesson involved finding ways to adapt to
local infrastructure. Many Indian retail establishments,
like their counterparts in Mexico, lack refrigeration.
Cadbury altered its formula so that Indias chocolate has
a higher melting point than chocolate sold in Europe.
Meanwhile, Cadbury began distributing coolers to
retailers in India; it has given away about 100,000 so far.
Finally, Puri says, a company needs to insert itself
into the local culture. Eight years ago, chocolate gifts
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Tuning In to the M&A Signalby Gerald Adolph and Alonso Martinez
One of the strongest indicators of an
emerging nations transition to a more
robust economy is the merger and
acquisition (M&A) activity of the com-
panies headquartered within its
boundaries. But executives can also
tune in to an earlier signal by analyz-
ing the relative economic value of ver-
tical and horizontal integration within
a targeted market sector. In other
words, the potential value of M&A
activity is itself a leading indicator of
when a market is ripe for entry. This
indicator can also provide insight
about where on a value chain to placeinvestment bets.
Mergers and acquisitions are
increasingly popular among multi-
national firms from developing coun-
tries. Typically, these companies seek
to migrate up the value chain (moving
from just manufacturing to conducting
their own R&D, and then to marketing
and branding their own products), and
they can accomplish this by merging
with counterparts in other emerging
countries and in industrialized
nations as well.
In 2005, the overall value of cross-
border M&A deals increased by 88
percent, to US$716 billion and the
number of deals increased 20 percent,
to 6,134. More and more of the parent
companies in these deals come from
emerging markets. The total number
of companies with corporate parents
based in Brazil, China, Hong Kong,
India, or the Republic of Korea has
grown almost five times since 1993,
from less than 2,700 to more than
14,800.
But dont expect all cross-border
mergers to be successful. An increase
in cross-border activity brings sub-
stantial risks for the merging compa-
nies. There are a number of reasons
that such acquisitions can fail. First,
few emerging-market companieshave the experience of managing a
complicated integration process.
Second, complexity increases when
transacting firms add affiliates in
more locations. Third, cultural, social,
and institutional differences lead to
higher managerial, governance, and
transaction costs. Fourth, managerial
capacity is spread thin during inte-
gration and coordination activities.
Finally, greater geographical breadth
means new external risks such as
foreign exchange fluctuations and
perhaps political uncertainty that
will have to be managed.
Some of the most successful com-
panies from developing countries
including Haier (China), Lenovo
(China), Arcelik (Turkey), Ingenuity
Solutions (Malaysia), and the pharma-
ceutical firms Bionova (Mexico) and
Cordlife (Singapore) moved slowly
and deliberately, acquiring the capa-
bilities for successful M&A bit by bit.
They learned how to manage the inte-
gration of new assets through local
country partnerships or R&D facilities
located in developed countries before
they made any substantial acquisi-
tions. They used small steps to
increase their presence in a foreign
market, and they tended to expand
into nearby markets that they alreadyknew. Developing the organizational
capabilities for cross-border acquisi-
tions seems to slow things down at
first, but the most successful compa-
nies have learned that it allows them
to move more quickly in the long run,
because they dont have to waste time
undoing the damage of a hastily con-
ducted deal.
Gerald Adolph (adolph_gerald@
bah.com) is a senior vice president in
Booz Allen Hamiltons New York office,
where he specializes in mergers, re-
structuring, and integration.
Alonso Martinez is coauthor of The
Flatbread Factor.
strategy+
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issue
46
were rare, but today they are popular. Cadbury co-opteda local phrase, Have something sweet today, which
means have a good day, as its slogan and pushed the idea
of chocolate gifts around Diwali, one of the countrys
most popular holidays.
Unilever is another multinational corporation with
experience operating dual platforms in emerging mar-
kets. Thanks to its long history in India, Unilever has a
wealth of expertise in developing products and business
systems for low-income consumers. It has also devel-
oped a dual platform in Brazil, based in part on its 2000
acquisition of the Bestfoods corporation (a producer,active in North and South America, of such staples as
mayonnaise and corn oil). Whereas most multinationals
focus on the wealthier populations of Rio de Janeiro,
Sao Paulo, and the southern states, Bestfoods developed
and acquired products and brands (Maizena and Arisco)
targeted at lower-income consumers in the poorer but
larger states of northeast Brazil.
Unilevers lower-income platform has allowed the
company to develop a formidable presence in both India
and Brazil, which positions it to capture the growth in
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these economies. In turn, by understanding the patterns
of development in these countries, Unilever can recog-
nize which strategies, products, and business models itshould apply to China and other developing markets.
Emerging Global Entrepreneurs
Meanwhile, the number of global competitors from
emerging markets is growing rapidly. These include
companies of Latin American origin, like Gruma and
Bunge; companies from India, such as automaker
Mahindra and Mahindra; and more and more Chinese
companies following the examples of Lenovo, Haier,
and CNOOC. Companies from emerging markets can
leverage a number of competitive advantages. They have
privileged access to the resources of their home country
(which might include natural resources in Russia or
Brazil, a state monopoly in China, or information tech-
nology advantages in India). They also have access to
low-cost financing from the International Finance
Corporation (the private-sector division of the World
Bank), as well as Islamic banks and development banks.
In addition, they have populations living abroad that
are already familiar with their products, and cultural
and language ties to many parts of the non-English-speaking world.
But their greatest asset is their expertise, honed
through years of production and marketing in home
regions. Their products and services are already adapted
to the lifestyles of their local customers; their executives
are already experts at capturing markets there. The chal-
lenge for these companies is learning to adapt their
platform externally. They must recognize when their
product or business model will fit the stage of the other
emerging markets they hope to enter.
Generally speaking, companies from transitioning
markets those accustomed to operating in a free mar-
ket economy are in a stronger position to exploitthese life cycles than companies recently yoked to social-
ism. Thats why there are more companies on the global
stage from Latin America than from the former Soviet
republics. Brazils Gerdau, for example, is adapting busi-
ness models developed over three decades of acquisition
and consolidation in Latin America to its enterprise
around the world, on a much more accelerated time
line. Gerdau is also building its business in the U.S.,
leveraging its role as the largest producer of nonflat steel
in Latin America. Another industrial company, the
Argentina-based Techint Group, has leveraged its Latin
American experience and sure hand in acquisitions and
alliances to sell steel and engineering services in North
America, Eastern Europe, and East Asia. (Together,
Gerdau and Techint account for almost half of the past
five years merger and acquisition transaction value in
Latin America.)
In Eastern Europe, Bunge has adapted swiftly to the
quick commoditization of its core food oil business.
Bunges Eastern European group, originally a grain
trading outfit that moved into oils for the solid profitmargins, was forced down the value chain as those
oil margins diminished. Leveraging group knowledge
from developing markets such as Brazil, as well as local
knowledge from acquired companies, Bunge began pro-
viding a more sophisticated line of food ingredients,
such as dairy fat replacements for use in chocolate
and ice cream.
An interesting case from another continent is South
African Breweries (SAB). In the 1990s, SAB realized that
the beer industry was underdeveloped and poorly
Coca-Cola sidestepped Russiasineffective distribution networks by selling
soda right out of shipping containers.
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46
managed in many transitioning markets and began an
acquisition spree, picking up breweries in other African
countries and former Communist nations. In each new
market, SAB systematically accelerated the industrys
development pattern to increase per capita consumption
and introduce higher-value products. Ultimately it
achieved the scale to merge with the U.S.-based Miller
Brewing Company, forming a new global company,christened SABMiller. In 2005, when it acquired Grupo
Empresarial Bavaria (the Colombia-based brewing com-
pany that was the second-largest in Latin America),
SABMiller gained dominance over the beer industry in
the Andean region, where it intends to replicate its strat-
egy of accelerating the markets development pattern.
Competitive Benefits
If your company is expanding
into global markets, it shouldfollow a three-step process
for creating effective
strategies. First, study
the conditions in
countries where your
business already has
a presence, or where
it hopes to enter.
Look for the most
effective fit between
your business model
and the relevant stages of
the emerging-market life
cycle. An accurate diagnosis
can make the difference be-
tween jumping in at the right time
to grab market share, and being ahead of your time
with no market for the product.
PepsiCo Inc. realized its snack food business in
Brazil lagged behind its businesses in other Latin
American countries because of high costs and poor dis-tribution, not lack of potential demand. By timing its
production and distribution investment correctly, Pepsi
enjoyed explosive and profitable sales growth.
The advantages of good diagnosis also accrue to
companies that correctly anticipate when a product will
shift from being an unbranded commodity typically
sold in bulk through fragmented retail channels to
being a branded packaged good. In China, the popular
shift from commodity edible oils to branded oils began
with the arrival of hypermarkets, supermarkets, and
branded convenience stores. The Kerry Group (a Hong
Kongbased food and chemicals producer owned by the
Malaysia- and Singapore-based Kuok Group) led the
way by introducing the brand leader Arawana. Some
regional competitors attempted to follow suit, develop-
ing brands for major cities such as Shanghai and
Guangzhou the edible oil equivalent of micro-
brewery beers. However, the delayed entry of thesecompetitors cost them, and most of these local brands
have not been profitable. By timing its investment just
right, Kerry captured a leadership position in a huge
and growing market. Its recent merger with Wilmar
Internationals edible oil business further enhances
that position.
The second step in the process is to use
each new market as a laboratory to
test new business models against
the readiness of differentcountries. Unilever ac-
complished this in the
1970s by synthesizing
small bars of detergent
(called RIN) for use
by customers who
wanted better ways
to clean clothes, but
had little discre-
tionary cash and only
limited access to running
water. Unilever shipped
these bars on trucks to the
hinterlands of India, creating a
substantial business in the process.
The company then extended this model
to Latin America with its Ala detergent. Designed
for laundering by hand, Ala did not need the expensive
enzymes that most washing machine detergents includ-
ed for removing stains.
A more recent example is Coca-Cola Companysinnovative solution to Russias ineffective distribution
networks. Coca-Cola has begun selling soda right out of
shipping containers; it equipped each container with a
sales office and arranged to drop off and pick up the
containers at sites around the country. If that system
proves to be successful, it could be applied in Africa
or central Asia.
In Latin America, Germanys Aldi Group is cur-
rently experimenting with a scaled-down supermarket
model. It is influenced in part by a 2006 Coca-Cola
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Retailing Research Council study that found that low-
income consumers dislike the hypermarket format andprefer smaller local stores; they dont have the time or
money to travel far to a hypermarket, and they dont
enjoy watching others buy what they cant afford.
The third step is to leverage your most successful
business models in other markets that are reaching sim-
ilar stages in the life cycle. For example, Pepsi has
learned that wine bars in Spain and other countries in
western Europe are excellent outlets for its snack foods
because bars are frequented by lunch crowds more than
in the United States. Pepsi has taken this distributionlesson to its Eastern Europe operations.
Some companies have developed a fast-response-
team approach, moving experienced teams to new
markets quickly when they spot an evolving industry
pattern. Bristol-Myers Squibb Company in Asia sends
in marketing and sales executives divided by the
channels they are pursuing: The market team for hyper-
markets is different from the team serving mom-and-
pop stores, because these two channels require different
platforms.
Gruma, similarly, deployed a senior beachhead
team to enter China, with skills honed through many
years of experience in Latin America. This team was thus
already primed to pick up early signals of market matu-
rity: a decrease in home cooking among dual-career
professionals, increasing penetration of fast food chains,
an increase in cold storage in supermarkets, and rapid
improvements in the logistics and distribution channels.
By studying a markets natural pattern, regardless of
the country, and then viewing that chronology through
the prism of that countrys specific context, businessmanagers will have a powerful new way of thinking
about emerging and transitional markets. Although it is
true that differences from country to country are
numerous, these differences should not blind executives
to the most significant similarities among markets. Its
by identifying and exploiting the similarities that busi-
nesses can gain leverage and success.
The ability to translate these insights into a coher-
ent business strategy is a competitive advantage and
may soon become a competitive imperative as the
global business environment opens up to new players.
Leading companies from emerging markets are alreadyfacing off with multinationals. Its often said that China
will accomplish in 15 years what took Brazil 35 years.
Executives will have much less time to react and adapt
to the market life cycle as the pace of globalization in-
creases and the ride picks up speed. +
Reprint No. 07106
Resources
Carmaking in India: A Different Route, Economist, December 13, 2006,
www.economist.com/business/displaystory.cfm?story_id=8413155: TataMotors plots a $3,000 car.
Stewart Brand, City Planet, s+b, Spring 2006, www.strategy-
business.com/press/article/06109: Describes the demographic shiftsdriving many of these market life cycles, and former Unilever executiveR. Gopalakrishnan recounts the RIN story.
Guillermo DAndrea, Leticia Costa, and Fernando Fernandes, SuccessfulRetail Innovation in Emerging Markets: Latin American CompaniesTranslate Smart Ideas into Profitable Businesses, Booz Allen Hamilton
white paper, January 2007, www.boozallen.com/emerging_consumers:A study for the Coca-Cola Retailing Research Council showshow breakthrough retailing makes a difference in Latin Americasmaturing consumer market.
Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs inthe West and Fails Everywhere Else(Basic Books, 2000): Explains how toundo the bureaucratic factors that constrain market life cycles.
Jean Kinsey and Min Xue, Supermarket Development in China, paperpresented at the China Workshop of the Worcester Polytechnic Institute,
June 1617, 2005, www.wpi.edu/Academics/Research/Sloan/China/supermarket-development.pdf: Fascinating preliminary study from
two researchers at the Food Industry Center, University of Minnesota,of grocery evolution in China over the last two decades.
Looking Forward, Acting Now, 2005 Annual Report, Gruma SA de
CV, www.gruma.com/vIng/relacion/relacion_annual.asp?anio=2005&idEmpresa=1&OpMenu=3: An unusually comprehensive annual reportlays out the companys global approach to markets and customers.
Alonso Martinez, Ivan De Souza, and Francis Liu, Multinationals vs.Multilatinas: Latin Americas Great Race, s+b, Fall 2003, www.strategy-business.com/press/article/03307: Explicates the nature of corporatecompetition in emerging markets.
Norihiko Shirouzu and Stephen Power, Unthrilling but Inexpensive, theLogan Boosts Renault in Emerging Markets, Wall Street Journal, October4, 2006: Chronicle of a $10,000 car for developing markets.
Michael Sisk and Andrew Sambrook, editors, The Whole Deal: Fulfilling
the Promise of Acquisitions and Mergers(strategy+business Books, 2006):Shows how a more effective acquisition process makes all the differencein implementing a successful two-platform strategy, particularly when a
company is entering emerging markets.
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strategy+business magazineis published by Booz Allen Hamilton.To subscribe, visit www.strategy-business.comor call 1-877-829-9108.